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The IRS says that the average tax refund mailed in 2008 topped $2,500. If you always get money back from Uncle Sam, it means you’re giving the government an interest-free loan.
Refund Checks Show Poor Financial Planning
I don’t care how much you enjoy getting that “bonus” once a year. Generally speaking, any time you get a federal tax refund, that demonstrates that there was a lack of proper financial planning on your part. Getting a big refund – no matter how good it feels at the time – isn’t smart, and it doesn’t make sense. Instead of letting the feds take out extra taxes, keep your money and use it wisely.
A Quick Fix via Your Human Resources Department
Go to your HR department at work and adjust your W-4 withholdings, so that your employer takes out fewer taxes from your paycheck. Your next paycheck will be bigger. Use the extra money to pay down your debt. When you raise your number of withholdings, make sure that you track your level of taxes paid. Don’t take out too few taxes and wind up with a big tax bill on April 15th. But if you owe a small amount to the government, that’s better than getting a refund; it means you had more cash the previous year.
Interestingly, a 2007 survey conducted by BIG research for the National Retail Foundation found that paying off bills was the top priority for people receiving tax refunds. Some 43% of those polled said they would use their tax refund checks to reduce debt. Another 38% said they would save the money. Only 10% of people said they would spend the money on things like vacations, clothes or electronics. Of course, there’s a lot of evidence that people often say they’ll do one thing with their money – and then they wind up doing something entirely different. You’ve probably fallen into this trap at least once, if not regularly. Have you ever planned to do something responsible with your money and then totally blown those bucks? Oftentimes, even the best of intentions can’t save us from ourselves if we let our impulses drive our financial decision-making.
Don’t let this step turn into one of those ever-growing things on your “I’ll do it later” list. Get into that HR office today – or the first day you return to work – and adjust your withholdings.
If you feel unsure about changing your withholdings or if you have questions about the process, pick up a copy of IRS Publication 919. This document will take you through the entire process and explain the correct way to fill out a W-4. Don’t worry. It’s not terribly complex. It simply boils down to this: When you adjust your W-4 at work, you’ll increase the number of allowances that you claim on line five of your W-4 form. Your goal is to decrease the withholding amount so that you ultimately receive a bigger paycheck. Bottom line: if you’re constantly receiving annual refund checks, adjusting your W-4 at work will instantly put money in your pocket.
That extra money will immediately get funneled into your paycheck. So let’s say you usually get a $2,400 refund, which is close to the average of what many people receive. Well, $2,400 dollars translates into $200 a month that you could be getting right now in your paycheck. If you get paid once every two weeks, expect to see an extra hundred bucks in each paycheck.
Next – Day 21: Sell or Donate Stuff You Don’t Want, Use or Need
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themoneycoach
Lynnette is a personal finance expert, author and speaker.